Richard Inder: Calan investors should sit tight

ING Property Trust's restart this week of its potential $172 million bid for Calan Healthcare Properties Trust is not a good look.

The blunder - which forced ING to relaunch its offer after discovering its Aussie affiliate was talking to Calan about another deal - would not be so bad if it were a cash-only deal. Calan's 5000 unit holders would then only need ask, is the price right?

But since ING is planning to make a $1.25 a unit bid made up of cash and units, investors have to consider the quality of management and strategy.

In this case, at least, ING management does not stand up.

ING managing director Andrew Evans - to his credit - admits the failing. Was a check made? "It did not occur," Evans said. "We will ensure that we have the systems and processes in place for anything else we undertake."

The restart has already blown back in ING's face. Investors who accepted the offer in the heat of the moment withdrew upon reconsideration.

But the debacle could have more serious consequences. If the bid turns nasty, Calan could frustrate ING by demanding assurances information did not pass to the New Zealand team that helped it pitch its offer. A rival bidder to ING could use the same strategy to get a stake in the game.

At the moment, the first of these scenarios seems remote.

Calan has been conciliatory, saying that the approach was an inherent recognition of its value.

But even if the bid does become a bare-knuckle brawl, the fight and the false start to the bid will not make much of a difference to the final outcome - Calan's management, led by Miles Wentworth, are on notice.

This is not because they have failed.

In the two years to December 31, which represents the bulk of Wentworth's tenure, the team has delivered a return to unit holders, according to ABN Amro, of 25.3 per cent a year. ING returned 18.7 per cent over the same period.

Calan's management have culled non-performing properties from the portfolio and built a solid platform for growth. Gearing stands at about 23 per cent of its $217 million gross assets.

Meanwhile, Calan's units have traded in line with the property sector and, on several days over the last couple of months, have exceeded their net asset backing per share.

One criticism of the team is that they have not delivered growth.

Its assets under management are not much above 2002's $210 million.

This is a weakness even Calan chairman Bruce Davidson admits to.

He says the Government's restraint on health spending and its dislike of public-private co-operation has forced the trust to look to Australia. (The planned deal with ING's Aussie arm was aimed at growth, not - as some have suggested - quitting its franchise across the Tasman.)

"It is not that there has not been intense effort. It has been a reflection of the market in New Zealand. There has not been the opportunity."

Still, it is not a bad performance for a company that, until a couple of years ago, was one of the least liked members of the NZX. The bottom line is that there may not be much light between the two managers.

The question of which has the best strategy may also be a tie - resolved by individual investment preferences rather than any inherent advantage one vehicle has over the other.

ING claims Calan's unit holders would benefit from its diversification. An $850 million portfolio spread across offices, retail and industrial property would, for instance, protect investors against a slowdown in healthcare.

Calan, however, sees strength in its somewhat narrow focus. As the population ages, spending on healthcare will increase and with that increase will come stronger demand for health-related properties.

The sector also offers the advantage of long leases (hospitals spend a lot of cash to accommodate facilities such as operating theatres and want an assurance they will not be turfed out before that investment delivers a return). Calan, says Forsyth Barr, has a weighted average lease term of 11.7 years against ING's five years and its properties have solid yields.

"It is a low-risk, medium-return business," Davidson says.

No, the winner of this contest will be determined by brute force and this is not a game Calan can win.

ING can spread its fixed costs, such as listing and directors' fees, across a bigger base. Its management and incentive fees last year, for instance, were just $576,000 more than the $2.1 million paid to Calan's manager, yet its portfolio is almost four times the size.

Property markets have over the last two years been swept by a wave of consolidation and Calan is just the next target.

Now that Calan is in play, others such as Macquarie Goodman or any of the numerous AMP funds are sure to take a look, especially since the number of targets is much diminished.

The only question to really be resolved is what price.

Its shares yesterday closed steady at $1.27, 2c above the proposed offer price. This suggests investors believe there is a chance someone else will enter the fray or that ING will offer more. (ING has signalled as much: Investors who accepted its first stand in the market will benefit from any improvement in terms.)

But even if ING only gets half the units, it will still wrestle the management contract from the incumbent. (It needs 75 per cent of units voted to win and will be in a strong position to achieve that.)

Whatever the outcome, unit holders are in a strong position. They, as Davidson says, should sit tight and see how the takeover develops.